MAKING THE OFFER
After you have completed the Buying Strategy Worksheet (see Figure 4.1), sit down with the sellers and talk about what is important to them. You know what you are willing to pay. Now is the time to see if you can get an idea of why they are selling. The why may give you a clue as to how anxious they are to sell and how soon they need to sell.
Make sure that you are talking to the decision makers. If a husband and wife own the house, have both of them at the table. If there is another decision maker, such as a relative or an attorney, it is best to first make the deal with the sellers and then make that deal subject to review by the third party.
Ask the sellers, “Why are you selling such a nice house?” Then listen.
Write down on a blank sheet of paper what reason you think you heard them say is important to them. Then show it to them to see if you heard them correctly. This may include a fast closing, a certain amount of money that they need at closing to relocate or rent another house, the relief from their current monthly payments, or money for other obligations. If they have other obligations that are bothering them (e.g., credit card bills, student tuition due, and so on), have them list them.
There are two reasons to have them list these obligations:
1. Many times, they do not know exactly what they owe. One spouse may have borrowed money that the other spouse is not aware of.
2. There may be times when you can take the responsibility for paying off an obligation as part of your purchase price. If the seller owes money to a contractor, an attorney, a hospital, or a creditor whom he is not currently paying, you may be able to work out a repayment plan with the creditor. Instead of paying the creditor all cash, you can pay a monthly amount, often without interest. Sometimes a creditor will agree to take less than is owed.
When you are trying to get the best price, you want the other party to set his highest price first—before you make an offer. This will provide you with the most you will have to pay for a property. Sometimes it is a great price, and you won’t have to negotiate. Typically, this number is close to a retail price or even higher.
House sellers often ask for more than they expect, hoping to get lucky. Setting a price too high is not a good selling strategy because it will turn off most buyers.
If you are the buyer, the price is only one of many things that you will negotiate. Some other items include the condition of the house, the personal property that will go with the house, the closing date, who will pay the closing costs, and the terms of any owner financing. You want to reach agreement on these and other issues that may come up, as part of the offer-making process.
As the buyer, your offer should be at a low enough price or with such good terms that you will be very happy if the seller accepts. If you are not at least a little embarrassed by your first offer, you are offering too much. You should fall off your chair if they take it (and sometimes they do).
Plan ahead in order to make your offer good for you. Don’t be overly concerned about what the sellers will accept. They will let you know if you are too low.
It is good strategy to ask for more than you really need to make the deal. The exception would be when buying from a distressed seller, which is covered later. Most sellers set the sales price a little high, anticipating that a buyer will make a lower offer. They may have a bottom-line price in mind.
Research what other comparable houses have sold for recently, and then compare the price of this house with those prices. Adjust the price for differences in condition or size, and then make your first offer below what you need to buy the house for to make a profit.
Suppose that a seller is asking for $250,000, and after researching the neighborhood you find that other comparable houses have sold for between $200,000 and $240,000 and that those houses were in better shape than the seller’s. You determine that the seller’s house is really worth between $200,000 and $220,000. Sometimes houses are on the market for years because they are overpriced. These houses can be opportunities, because the seller eventually becomes more motivated to sell and the market values catch up with her high price.
You decide that you would like to buy this house for about $175,000 and the owner wants $250,000. The house is vacant and needs cosmetic repairs and has been on the market for a year. Your first offer should be $160,000.
NEVER, NEVER, NEVER try to think for the seller. Make your first offer an offer that you know will make you money and see how she responds. At $160,000 you know you have a bargain.
It often takes more than one offer to get an acceptance. The seller may counter your offer with a different price and terms you can counter back, or she could make a different offer entirely. How do you decide which approach to take?
After your $160,000 offer, she tells you how much she has spent fixing up the house, and how the neighbors down the street just sold a smaller house for $275,000 (both fiction) then she counters with $225,000. By coming down $25,000 she shows that she is open to another offer, so you offer $165,000, but say that that is absolutely as high as you can go.
She wrings her hands and says that little Johnny will have to wait to go to college and counters with her final offer of $200,000. You thank her for compromising but say that this is the most you have ever paid for a house in this neighborhood. However, you are willing to split the difference with her and pay $175,000 if she will include the appliances. She sighs and agrees.
However, what if after your first offer, she counters at $245,000? With that small of a move she is unlikely to get down to your price. So take a different approach. Offer her $175,000 with $10,000 down and the balance payable at $1,000 a month, including 3 percent interest. That gives her a higher interest rate than she can earn in a bank.
You would have researched the income and expenses, and would know that the house will produce a net income of conservatively $1,100 a month, giving you a very acceptable $100 a month cash flow on your $10,000 investment.
Stop and think about these last two offers. If you could have either one accepted today, which would you choose? Whichever you choose, make that type of offer first, next time. For a full day of negotiation strategies, study my course “Negotiation Secrets of a Professional Buyer” (further details on this can be found on my website www.johnschaub.com). You can always improve as a negotiator, and improving pays well.
When a seller uses your offer to solicit a higher offer from someone else, it is called shopping your offer. While this is good for the seller, it’s not good for you. Real estate brokers who represent the seller will sometimes try to get two buyers to bid against each other to get the seller a higher price and to earn a higher commission.
You can avoid people shopping your offer by making an offer that has to be accepted or rejected in a short period of time. An offer can contain a clause that states that the seller must respond by a certain time and date, for example by “5:00 p.m. on July 1, 2016.” If you are making an offer directly to a seller, ask him or her before you make the offer, “Are you ready to sell your house today?”—then make an offer. The seller needs to accept it or make a counteroffer now (or within a few hours). Never give sellers several days to think it over. They will use those days to get a higher offer from someone else.
Tell the sellers that the offer is good today and today only. If they don’t accept, your offer is off the table. If they come back to you later and want to sell, you can reconsider, but you won’t guarantee to pay this much.
You can add strength to this statement by telling them about another house you are looking at and saying that you cannot afford to buy them both. Tell them that you like their house better and are making them your first offer, but if they don’t accept it, you will then try to buy the other house.
Dee Fountain was a successful agent who insisted that a seller make a counteroffer and did it with a smile so that the sellers were encouraged to make some concession to keep the deal alive. “Don’t tell me what you won’t do; tell me what you will do.”
When a seller refuses your offer ask, “Would you buy this house today for what I am offering you?” If he turns down your offer, he has, in effect, just bought his house for that amount—he could have had your money instead of his house.
When you make an offer, you typically show that you are serious by including a deposit with the contract. Do not give the seller this deposit. Make your check out to an attorney or title company who will handle the closing.
If you need to gain creditability with the sellers by showing them that you have the money necessary to buy their house, you could bring a cashier’s check payable to your attorney or title company with you and attach it to your offer.
If you are agreeing to close within a short period of time—a week or two—agree to make the deposit with the attorney or title company within forty-eight hours after they have accepted your offer. If you are signing a contract on a weekend, you typically have to wait until Monday morning before you can give the attorney or title company your check.
This gives you time to raise the down payment if you don’t have the money, and a way out of the deal if you change your mind. The language in your offer will determine who gets the earnest money and what happens with it in the event that either the buyer or the seller fails to close.
Use language that protects you. The contract may state that you are entitled to a refund of your deposit if you don’t close because of certain reasons; for instance, an inability to finance the property. It may state that the sellers can keep your deposit as liquidated damages if you don’t close, but that is all that they can have and that you have no other liability. The language in a broker’s contract is more likely to favor the seller and the broker over the potential buyer.
If a real estate agent is involved, the agent will want to hold the deposit. Give the agent the smallest amount possible. One hundred dollars is sufficient if you are agreeing to close in a week or two. Both the seller and the broker will want more deposit money if the closing date is months away.
Hiring a home inspector to give a potential purchase a good look is a great idea. A home inspector should check out all the major systems, such as plumbing, electrical, heat/air conditioning, and the structure and roof. Meet him at the house, and walk around with him. Don’t pester him with too many questions, but watch him work and learn from watching. You will learn a few tricks that you can use yourself.
He will give you a written report that you then can use to negotiate with the seller in the event that you find a previously undisclosed problem with the house. If you have already negotiated a great deal, don’t be foolish and ask for more if the problems you discover are small. Your counteroffer will let him out of the obligation to sell to you, and he may then sell to another buyer for more money.
Instead of negotiating over small items, use the home inspection as an insurance policy against major problems that you might otherwise miss. If you are having second thoughts about buying the house after reading the inspection, this means that you have not made a great deal and that you should ask for more concessions from the seller. If this does happen, you should be willing to risk the deal getting away.
Sometimes a seller will want his or her attorney or a family member to look over or approve a contract. Often this is done because the seller does not understand the contract. This is why you should try to make your offers as simple as possible.
If the seller still insists on having a third party involved, use language that keeps the deal together, unless the third party can introduce new information that influences the seller’s decision. For example, with an attorney, insert a clause that says, “This transaction will close as agreed unless Attorney [enter the attorney’s name] notifies both the buyer and seller in writing within three days stating how the contract is not in compliance with current statutes and regulations.”
Never say that it is “subject to the approval” of an attorney or anyone else. No attorney would ever put his stamp of approval on anything that might subject him to liability.
If you are negotiating with one party in a divorce, one heir to an estate, or one partner in a partnership that is splitting up, then make your offer subject to being able to buy out the other party on terms agreeable to you. This will be a totally separate negotiation. You can pay a different price or buy on different terms. With a property that has multiple owners in title, often one will need cash today and will be willing to accept less money if he or she gets it now. Another owner will hold out for a higher price but be willing to accept terms.
Although these negotiations take more time, they also have more potential for profit. Of course, you need to make any purchase of a partial interest subject to being able to buy the rest of the property. A partial interest is hard to sell, and it can be expensive to force another partial owner to sell.
Sellers are more likely to accept an offer that they understand, gives them instant or near-instant gratification, and requires them to do little work.
1. First, keep your offer simple. Avoid long, complicated contracts. Sellers will refuse to sign them simply because they can’t understand them. Sellers need to know how much money they are going to get and when they are going to get it. Be as specific and clear as possible on these two points.
2. Second, make a net offer with you paying all the closing costs. Know what your closing costs will be, and calculate them into your offer. This gives the seller the answer to “How much money will I get?”
3. Third, offer to buy the house in “as is” condition. This allows the seller to leave the house without doing any work. By taking all the risk, you can increase your profit. Of course, you need to either inspect the house thoroughly before you make the offer or make the inspection a contingency in your contract. Even with an “as is” offer, you can require the seller to leave the house in its current condition, without further damage. Walk through the house before you close to make sure that it is in the same condition as it was when you inspected it. If there is additional damage, you can renegotiate the price to compensate for it.
4. Finally, offer to close quickly. Sellers will often accept lower offers that close sooner. They are selling because they need money now. If they could wait, they could sell for more.
If you can incorporate all these items into your offers, you will buy more houses and further below the market.
The checklist that follows will take you step by step through the process of finding, negotiating, and closing your first deal. Use it for every house you buy.
2. Write down the one urgent problem you can solve for the seller.
3. Establish the fair market value, give or take 5 percent.
4. Research the market rent and likely net income the property will produce.
5. State your minimum acceptable profit on this house.
6. Formulate an offer that solves the seller’s one urgent problem.
7. Make the offer. Insist on either an acceptance or a counteroffer. (Remember: Don’t tell me what you won’t do; tell me what you will do.)
8. Make another offer based on any new information.
9. If the seller is unresponsive but you remain convinced there is opportunity, go away and come back in a week with another offer.
10. Get the contract accepted and signed by all parties.
11. Make your earnest money deposit with the closing agent.
12. Retain rights to use a house inspector and termite inspector, if needed.
13. Order a title search with a title company, attorney, or escrow company, and furnish these agents with a copy of your fully signed contract.
14. Talk with the agent or attorney who will prepare the closing documents to alert him or her to any unusual clauses in the contract.
15. Get copies of any documents you will be required to sign the day before the closing, and get a copy of the title insurance commitment—read them to check for exceptions.
16. Read closing documents (very carefully!).
17. Walk through the house the day of the closing, after the sellers are completely out of the house.
18. Go to the closing, review the documents, and collect the appropriate items listed on the closing documents list, and get the keys and garage door opener.
Note: When you are buying, take your time. Time is on your side. Having both the buyers and the sellers at the closing can work to your advantage. When you are selling, sign documents in advance. Only go to pick up your check after the buyer has signed everything and left.